MBS MID-DAY: 2/22/2012

Existing-home sales rose in January, marking three gains in the past four months, while inventories continued to improve, according to the National Association of Realtors®.

Total existing-home sales1, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 4.3 percent to a seasonally adjusted annual rate of 4.57 million in January from a downwardly revised 4.38 million-unit pace in December and are 0.7 percent above a spike to 4.54 million in January 2011.

Lawrence Yun, NAR chief economist, said strong gains in contract activity in recent months show buyers are responding to very favorable market conditions. “The uptrend in home sales is in line with all of the underlying fundamentals – pent-up household formation, record-low mortgage interest rates, bargain home prices, sustained job creation and rising rents.”

Total housing inventory at the end of January fell 0.4 percent to 2.31 million existing homes available for sale, which represents a 6.1-month supply2 at the current sales pace, down from a 6.4-month supply in December.

“The broad inventory condition can be described as moving into a rough balance, not favoring buyers or sellers,” Yun said. “Foreclosure sales are moving swiftly with ready home buyers and investors competing in nearly all markets. A government proposal to turn bank-owned properties into rentals on a large scale does not appear to be needed at this time.”

Total unsold listed inventory has trended down from a record 4.04 million in July 2007, and is 20.6 percent below a year ago.

There was a moderate amount of data and opinion in the overnight session, and if you were so inclined, a case could be made for connecting that data to the market movements. For instance, weak manufacturing numbers in Europe (particularly Germany) as well as plenty of chatter about the tenuousness of the Greek bailout are thought to have helped bond markets maintain some support levels and come into the domestic session at slightly better levels than yesterday.

While we wouldn't disagree that some measure of causality exists, it looks and feels more like one of these situations where the data simply "passed on an opportunity" to suggest markets do something different than the bigger considerations suggest. In short, we're looking at this morning in the simplest terms possible--i.e. not reading too much into the minor details as we feel like the bigger details are driving trade.

What are those "bigger details?" Naturally there's the evolving reaction to the Greek bailout. Seems like a lot of "yeah buts" floating around out there, and rightfully so. Those go a long way toward explaining why bond markets have weakened to a a certain point yesterday and seem to be holding inside that range so far today. But with no material counterpoints, it's not creating a whipsaw bounce in the other direction. The need to be in position for today's 5yr Note auction is also likely keeping a lid on the more pronounced desires for a bounce-back rally.

10yr yields are currently 2.047 (as yet, unable to get back below the 2.045 pivot) and Fannie 3.5 MBS are 3 ticks improved at 103-03. The morning’s major economic report should prove to be a relative non-event: Existing Home Sales at 10am. More significant are the Fed’s long-end buyback concluding at 11am and the 5yr Note Auction at 1pm.

David H. Stevens, President and CEO of the Mortgage Bankers Association (MBA), issued the following statement regarding the Federal Housing Finance Agency's (FHFA) proposal for next steps in its conservatorship of Fannie Mae and Freddie Mac, collectively, the Government Sponsored Enterprises (GSEs):

"MBA welcomes FHFA's proposal for the next phase of the conservatorship of Fannie Mae and Freddie Mac. We have been out front on GSE reform issues, and our Council on Ensuring Mortgage Liquidity outlined many of these same types of changes in its September 2009 proposal on the future of the government's role in the secondary mortgage market.

"We greatly appreciate the constructive nature of the proposals outlined by FHFA Acting Director Ed DeMarco to wind down Fannie and Freddie, only after taking steps to create a new infrastructure for the secondary mortgage market. Moving towards a single security, aligning servicing requirements and reducing the retained portfolios while avoiding a fire sale are all moves that we have supported. We look forward to working with policymakers, including FHFA, to refine the roles of the GSEs and to bring private capital back to the market.

"Uncertainty, wherever it exists, must be removed and a clear path forward must be laid out, in order for the housing market in this country to be strong and vibrant. This proposal that FHFA is putting forth shows a strong commitment to doing just that."